All posts tagged Vampire Squid

Economists at Goldman Sachs says the extension of the FOMC meeting next month to a two-day session makes the decision to embark on another round of easing a bit more likely than before.

“Past experience suggests that the probability of easing is higher at two-day FOMC meetings, all else equal,” they say in a report after Bernanke’s speech.

“We continue to think that further easing via manipulation of the Fed’s balance sheet — either through expansion or restructuring of the average duration of holdings — is likely by early2012,” they add.

He’s assuming US policymakers will make further efforts to encourage companies to use their “huge amounts of cash” for investment and job creation, despite the challenges of the fiscal deficit, he said.

Oh, Vampire Squid, the dollar has been so good to you, and this is how you treat it?

Goldman Sachs is just out with a note saying it is going short the US dollar, because of the Fed. Which probably means it’s really long, but whatever. The dollar is actually jumping today in a safe-haven bid.

When Goldman Sachs reported second-quarter results, the Street seemed surprised that the mighty trading giant had stumbled in the game of risk.

But today, one wonders if it stumbled or was, perhaps, just a bit early in its insight. In an ocean of red, Goldman Sachs is trading modestly higher today, gaining about 0.3% to $131.55. All of its financial rivals are trading lower, along with the broader market.

Let’s go back and look at what Goldman said when it reported on July 19. Chiefly, it had sharply reduced its risk-taking. Its Value at Risk measure dropped to $101 million, down 26% from the year-ago quarter and its lowest VaR since the 2006 third quarter.

That reduction in risk looks pretty shrewd as the Dow Jones Industrial Average chases a ninth-straight loss and turmoil grips the European markets.

Goldman Sachs has been a halfway decent barometer for commodities this year, turning bearish in April just before a big selloff and getting bullish in May ahead of a little pop, though that turned out to be short-lived.

Now the Vampire Squid is getting even bullish-er, with a note today calling for “further upside momentum” in commodities, especially the Brent crude, UK natural gas, copper, zinc and soybeans for which Goldman has a special soft spot:

This week’s heavy selloff in Treasurys has prompted Goldman Sachs, one of the biggest Treasury bond dealers, to declare that the months-long bull run is dead.

“We think the rally is over,” Francesco Garzarelli, chief interest-rate strategist in London at Goldman Sachs Group Inc., said in an email interview with Dow Jones Newswires on Thursday. Goldman has long held to the view that Treasury prices would fall over the course of this year.

This past week, the Treasury market has sold off in each trading session. The benchmark 10-year note’s yield, which moves inversely to its price, has surged more than 30 basis points to 3.151% Thursday from a six-month low of 2.842% on Monday.

Jefferies, a Wall Street investment bank, reports earlier than its brethren, giving its results a sort of oracular quality. Which is probably cold comfort to folks toiling at places like Morgan Stanley and Goldman Sachs.

Dow Jones Newswires:

“Jefferies’ 2Q results are first sign of lower equities trading volumes among the big banks as equities revenue dropped 8% from a year ago. Talk of lower volumes has prompted speculation in recent weeks about layoffs on the Street as banks grapple with new regulatory requirements and scant revenue growth.

“Fixed-income revenue, however, climbed slightly, up 2.3% from a year earlier. Jefferies once again experienced growth in its investment banking unit, where revenue rose 28% from a year ago on strong debt underwriting activity. Shares off 3.5% premarket as earnings missed analysts’ estimates.”

The mixed results are just one more of what our Deal Journal friends are calling a Charlie Brown summer. Not much is going right, from regulatory pressure, to light trading volumes, to shrinking share prices.

If you’re a bank investor lying awake at night worried about an onslaught of regulation and capital requirements laying waste to bank profits and the economy, take heart: Congress may be more on your side than you realize.

The most widely held stock in the portfolios of major House congresshumans is Goldman Sachs, according to Robert Wenzel, editor of EconomicPolicyJournal.com. J.P. Morgan, headed by Jamie Dimon, who has been publicly fretting about the effect of onerous bank regulation, is also a top holding:

House Speaker John Boehner holds stock positions in JPMorgan Chase and Goldman Sachs. Congressman Paul Ryan, chairman of the House Budget Committee also has Goldman Sachs and JPMorgan stock in his portfolio. Eric Cantor owns stock in Morgan Stanley and Goldman Sachs. Daniel Issa owns stock in Goldman Sachs and JPMorgan Chase.

“The banksters own the regulators and in turn regulators own bankster stock,” Mr. Wenzel writes. “Cozy.”

For the record, a closer look at these disclosures shows these people own a lot more than bank stocks. And both parties are constantly going hat in hand to Wall Street for big donations.

Anyway, this revelation comes on a day when the House Financial Services Committee is holding a hearing on financial reform, with lots of warnings about how too much regulation will drive business overseas, to places like Europe, where the banking system is so famously stable right now.

“We don’t comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them we cooperate fully,” spokesman David Wells said in a statement.

This isn’t totally shocking; Liz Rappaport and Jane Eaglesham warned it was coming last month. The CDS market, at least, was already bracing for it. But Goldman shares are down more than 1% after being flat just before the news broke.

What’s more, it briefly seemed to have some effect on the broader market. Stocks momentarily fell just a tad more than they had been, though they’ve since recovered. Tom di Galoma of Oppenheimer said it may have pushed Treasury yields back below 3%, though that effect has faded, too.

As we noted last week, the squid’s Credit-Default Swaps (CDS), a form of insurance against a debt default, have recently become wider that similar CDS prices for Citigroup. Goldman’s shares are up 1.6% to $140.86, but they remain down more than 16% for the year. Citi is down 13% this year and Morgan Stanley is off 11% year-to-date.

Dow Jones Newswires:

“[The upgrade came after] a group meeting with Goldman’s vice chairman and Co-CEO Michael Sherwood. JPM concluded that the firm’s strategy is clear and recent negative newsflow impact on franchise is over-discounted.

“‘Based on our own analysis, we see material re-leveraging potential. Hence, we upgrade Goldman Sachs,’ says JPM. The firm Has a $175.00 target on Goldman Shares.”

It’s hard out there for a vampire squid. Goldman Sachs has been the worst-performing major US bank in the credit-default-swap market this year, writes Moody’s analyst Tony Smith:

Goldman has underperformed all other major US banking franchises in the CDS market in 2011. Goldman’s CDS 5-year mid-spread has widened by 23 bp in 2011 from 115 bp to 138 bp.

This means, in other words, that it costs $115,000 $138,000 to insure $10 million of Goldman debt against a default. He goes on:

The spread is now wider than the A3 rated Citigroup, which has improved since the start of 2011 from 141 bp 127 bp. The CDS 5-year mid spread at Goldman has also underperformed versus other lower rated financial companies such as Bank of America (which has improved in its CDS spread this year from 160 bp to 142 bp) and Morgan Stanley (which has improved from 163 bp to148 bp), both of which are rated A2 for senior unsupported debt. Given Goldman’s current franchise issues and reputational challenges, as well as its negative rating outlook, investors should be wary of additional headline driven spread deterioration and the company’s continued decline in market-implied ratings, which signal underperformance in the credit markets.

By “reputational challenges,” he refers to the recent barrage of downbeat news about Goldman, from Matt Taibbi’s latest piece to Sen. Carl Levin’s accusations of Goldman wrongdoing ahead of the crisis. Goldman CFO David Viniar said recently he thought Goldman clients considered the Levin report yesterday’s news, but subpoenas are on the way, meaning the story’s not over. Whether the government would ultimately ever let Goldman actually default, however, is an entirely different story.

About MarketBeat

MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what’s happening in the markets. Lead writers Paul Vigna and Steven Russolillo spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to paul.vigna@wsj.com or steven.russolillo@wsj.com.

Technology companies whose earnings disappoint investors are paying an unusually large toll this quarter, highlighting Wall Street’s high expectations for the sector at a time of uneven economic growth.